We stand on the precipice of the greatest economic disaster since the Great Depression. It is associated with the exogenous shock of a novel Coronavirus that originated in Wuhan China and quickly spread into a worldwide pandemic.

The sequence of events leading to this crisis, not the virus itself, deserves to be called a “Black Swan.” Biology dictates that pandemics will recur and at unpredictable intervals. Pandemics claim human lives, ruin health, and depress economic activity, but they are not expected to alter the shape of society as we know it. The Medieval Black Death is an exception. Coronavirus could be as well with wrong policy choices.

The Coronavirus Black Swan is due to what the International Monetary Fund calls the Great Lockdown; namely, the political and administrative decisions to shut down much of the world economy in the hope of mitigating the Coronavirus pandemic. World leaders, with few exceptions, deliberately opted in favor of our ongoing “non-biological Black Swan” emanating from Coronavirus.

By definition, each pandemic is something new, an event never before experienced. For this reason, we look to the past for parallels that might provide some guideposts for the Coronavirus Black Swan.

Coronavirus is the most recent in a line of worldwide flu pandemics. The postwar variants (SARS, MERS, Ebola, Avian Flu) accounted for a low of 455 to a high of 11,323 fatalities worldwide. They had few significant effects on a broad swath of the world’s economies, although particular regions and countries were hard hit.

Coronavirus currently stands at a quarter million fatalities, and few countries have been spared its wrath. Although the public health experiences gained from postwar viruses are invaluable, they do not serve as good historical guides for the future course of Coronavirus.

The Spanish Flu of 1918/19 is different. Its mortality and health effects dwarf Coronavirus. It killed between 20 and 50 million worldwide between 1918 and 1920. As of May 2020, Coronavirus has killed a quarter million. The Spanish Flu matches Coronavirus in terms of territorial coverage, but its fatality rate (3.5 percent) is a large multiple of whatever Corona’s will be.

Both the Spanish Flu and Coronavirus were countered by Non-pharmaceutical Interventions (NPIs), such as school and business closures, quarantines, travel restrictions and do on. Researchers have begun to study the economics of NPIs during the 1918-19 pandemic. We know that they were of shorter duration and impact than today’s Great Lockdown.

In effect, the Spanish Flu offers a valuable “worse case” scenario for Coronavirus by applying its scary parameters to the current pandemic.

This paper addresses, not the virus itself, but the economic damage emanating from the Coronavirus.

We begin with measuring the economic impact of the Spanish Fl before turning to its lessons for Coronavirus 2020.

The most direct measure of the economic cost of a pandemic is lost economic activity. The most common aggregate measure of such costs would be the decline in real GDP or industrial production (relative to trend) that is attributable to the pandemic. Researchers have used municipal and regional data as an alternative to try to tease out the loss of economic activity due to the Spanish Flu but with contradictoryresults.

For the US data, none of the two GDP and two industrial production series suggests a detectable effect of the Spanish Flu on economic activity-- not that there weren’t significant downturns during this period of history, such as in 1914 and 1921.

In their classic study of the US business cycle, Arthur Burns and W.C. Mitchell make no mention of the Spanish Flu (that I could find). They characterize 1918-19 as a mild downturn that was speedily reversed.

America’s entry into World War 1 could confound the above finding of an insignificant economic effect of the Spanish Flu. In 1917, 719,000 men were in the armed forces. Within a year, that figure rose to almost three million. During the call up, the unemployment rate fell from an average of five percent to 1.4 percent in 1918 and 1919. Another complicating factor is that the US economy was gearing up military production during this period – a form of stimulus of the economy.

To sum up for the US, the best available historical data suggest that, despite its horrendous human capital costs, the Spanish Flu did not affect US economic activity in a significant way.

The European data for the period of the Spanish Flu offer something of a natural experiment that allows us to abstract from the effects of World War I: By focusing on non-combatant nations, we can get a somewhat cleaner look at the Spanish flu’s impact. This does not mean that the war did not affect economic activity in the non-combatant countries, just that its effects were less distortive than in the combatant countries.

The European data show a clear decline in GDP for European non-combatant countries in 1918, averaging some seven percent. However, the losses of output in non-Spanish-Flu years of 1917 and 1921 were equally large.

For the first quarter of the 20th century, the Spanish Flu appears to be just one of many economic setbacks for Europe. Much longer time series from Maddison cement the conclusion that 1918-19 does not especially stand out as a significant economic event.

The United Kingdom was a combatant in World War 1 but did not serve as a battlefield. The Spanish Flu peaked in the UK after the November 1918 armistice, as troops returned home in cramped rail cars and transport ships.

The UK data show 1918 to be a year of modest or zero GDP growth. As the Spanish Flu made its way into the UK in 1919, the economy went into decline, falling 12 percent according to Maddison and 7 percent according to the Bank of England figures.

The years following the Spanish Flu were difficult ones, with substantial declines in 1920 and 1921. UK growth did not resume until 1922. There is a massive literature on the multiple causes of the UK’s “interwar slump.” Major surveys of this literature do not mention the Spanish Flu as a cause.

The broad conclusion to be drawn from the macro data is that, despite its immense demographic damage, the Spanish Flu did not depress economic activity in the US and Europe in a significant fashion. The UK was a possible exception but experts on the UK’s interwar slump blame a number of factors other than the Spanish Flu.

These results should not come as a surprise. Here is why:

A pandemic can affect the economy through three channels: On the “human capital” front, pandemics reduce the labor force by excess mortality. Illness reduces labor hours and productivity. The population’s physical and mental health are eroded, and schooling and training are sacrificed. Insofar as the stock of human capital may be diminished, the pandemic’s effect may cover a longer period of time.

The second pandemic-to-economy channel would be through individual choices prompted by fear of the pandemic. People may limit mobility, engage in voluntary social distancing, keep their children home from school, flee to other jurisdictions, or avoid social/business gatherings. These behavioral changes, it should be noted, are voluntary but could be affected by public-service information provided by government.

The third channel from pandemic to the economy are NPI’s, such as state-decreed business and school closings, binding restrictions on mobility, quarantines, and other ordinances that are imposed by government to stop or slow down the spread of the disease through non-medical measures.

The first channel should not have a large impact on economic activity. Despite its horrendous loss of life and health, fatalities from the Spanish Flu accounted for two percent of world population and, for the US and Europe around one percent of the labor force. Standard growth models suggest that the Spanish Flu’s human capital losses would show up as a small dip that would soon be obscured by other factors.

One of the few efforts to model the three channels of transmission from pandemic to economy was undertaken by World Bank analysts in 2006. They posited a hypothetical case of a pandemic of person-to-person Avian flu under “worst case” parameters of a Spanish-Flu-like event. Their conclusion is that the combined human-capital and voluntary-avoidance channels would depress GDP in the high-income countries by 3 percent.

Three percent happens to be the loss of output in the advanced countries from the Great Recession of 2008-9. So, the World Bank exercise, if it is accurate, suggests that the Coronavirus impact on the industrialized world – with avoidance strategies voluntarily employed by the people but no Great Lockdown -- would have created an economic loss of the magnitude of the Great Recession.

If we now add, the Great Lockdown (with forecasts of a six percent loss of GDP for 2020 or worse), we see that the Great Lockdown has doubled the effect of Coronavirus, and the underlying model applies to a virus of the virility of the Spanish Flu.

If we find large economic effects associated with a pandemic, they would be due to the second or third channels, or a combination of the two. For the human capital channel, we would expect, at the most, a small negative effect on aggregate economic activity.

During pandemics, the second and third channels could merge. Individual reactions could spill over into revolts, revolutions, civil disobedience and a collapse of law and order. Government-imposed NDIs could shut down the economy, create poverty, and spawn civil unrest. Whereas the demographic and human capital impacts are limited in scope, the upper bounds on the other two channels are not well defined.

Conclusions

First, the Great Lockdown currently in place worldwide represent modern history’s most extreme reaction to a pandemic. It is these measures, rather than Coronavirus itself, that is the Black Swan.

Second, Coronavirus is the first pandemic of modern history that has resulted in colossal economic costs worldwide.

Third, the Great Lockdown may reflect the differences in public perception of pandemics that have evolved over a century of time. Pandemics and plagues were a normal part of life in 1918-19. People simply went about their business during plagues and fatalistically accepted the consequences. In the century since the Spanish Flu we have come to believe that science and technology can handle all problems. To accept the mortality consequences of an invisible enemy is no longer in our public choice set.

Paul Roderick Gregory is a professor of economics at the University of Houston, Texas, a research fellow at the Hoover Institution and a research fellow at the German Institute for Economic Research.